UPDATE 3-China economy slows on tightening, seasonal factors

* PMIs show moderating Chinese growth

* Official May PMI 53.9 vs 55.7; HSBC PMI 52.7 vs 55.2

* Seasonal factors may exaggerate softness

* Reports suggest no quick shift in economic policy stance
(Adds analysts and market reaction)

By Langi Chiang and Alan Wheatley

BEIJING, June 1 (BestGrowthStock) – The pace of China’s factory
output eased last month as gradual policy tightening took a
toll on new orders, suggesting to some economists that Beijing
will take its time before nudging interest rates higher.

But a pair of surveys of manufacturing executives pointed
to a loss of momentum, not a sudden stop, in the world’s
third-largest economy, which is underpinned by rising incomes
and vast infrastructure spending.

The purchasing managers’ index (PMI) issued by the China
Federation of Logistics and Purchasing eased to 53.9 in May
from 55.7 in April. That was close to the median forecast of
54.0 in a Reuters poll of 10 economists.

A companion index compiled by British research firm Markit
for HSBC dropped to an 11-month low of 52.7 in May from a
downwardly revised 55.2 in April.

“The slowdown in the headline manufacturing PMI suggests
that the overheating risk is likely to ease as tightening
measures filter through,” said Qu Hongbin, chief economist for
China at HSBC.


Insider TV: HSBC Chief China economist on the economy

Graphics: China’s PMIs:

Beijing has applied the brakes to money and credit growth
and has rolled out a raft of measures to deter speculative
buying in real estate.

The central bank has also raised the proportion of deposits
that banks must hold in reserve, rather than lend out, three
times this year.

But China has resisted international pressure to let the
yuan rise and has kept benchmark interest rates unchanged
despite an acceleration in year-on-year gross domestic product
growth to 11.9 percent in the first quarter from 10.7 percent
in the final quarter of 2009.

Qu said slowing growth, plus worries about the impact on
Chinese exports of the European debt crisis, was likely to
delay an increase in interest rates to next quarter.

Prime Minister Wen Jiabao, speaking in Tokyo, said on
Monday that Chinese growth was on track but that it was too
early for countries to consider withdrawing anti-crisis
stimulus policies.


The PMI indexes are closely watched because they give a
timely snapshot of how industry is faring. An index reading
over 50 denotes expansion; a sub-50 figure signals contraction.

The slower growth suggested by the PMIs weighed on share
prices. The MSCI index of Asia Pacific ex-Japan stocks
(.MIAPJ0000PUS: ), which has been underperforming world equity
markets so far this year, fell 0.93 percent. [ID:nTOE650032]

Shanghai stocks (.SSEC: ) ended the morning with a fall of
just over 1 percent.

“The result indicates weakening of momentum in the
manufacturing sector and confirms our expectation that GDP
growth will slow sharply in Q2 and continue decelerating in
Q3,” Dariusz Kowalczyk, chief investment strategist with SJS
Markets in Hong Kong, said in a note.

But May’s reports reinforced the suspicions of some
economists about the reliability of the surveys.

Goldman Sachs economists Yu Song and Helen Qiao noted that
the official PMI has consistently fallen in May — when there
is a long public holiday — since it was launched in 2005.

“After adjusting for this seasonality, the May reading was
slightly higher than its April reading. Therefore, we would not
view the softening in the headline PMI as a sign of much softer
industrial growth in May,” they said in a note.

Zhang Liqun, a government economist, said it was tough to
judge whether the decline was due solely to these seasonal

“The fall may indicate the economy is slowing from its fast
pace of growth,” he said in a comment issued by the logistics

The moderation in the indexes was broad-based. They
indicated that the pace of output, new orders and employment
all softened, while the prices paid by companies for their
inputs rose less sharply.

But Qu with HSBC said money and credit growth was still
excessive and would require further increases in banks’
required reserves and administrative lending curbs in coming

“China’s GDP growth should continue to cool off in the
second half of 2010, which is a must to contain inflationary
risk. Despite the property measures and uncertainties on
exports, GDP growth is still likely to stay around 9 percent in
the second half, thanks to continued investment into ongoing
infrastructure projects and steady growth in wages and
consumption,” he said in a note.

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(Reporting by Langi Chiang and Alan Wheatley; Editing by Ken
Wills and Neil Fullick)

UPDATE 3-China economy slows on tightening, seasonal factors